Unitil Corp (UTL) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2013 Unitil Earnings Conference Call. My name is Jason and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. David Chong, Director of Finance. Please proceed, sir.

Good afternoon, and thank you for joining us to discuss Unitil Corporation's third quarter 2013 financial results.

With me today are Bob Schoenberger, Chairman, President, and Chief Executive Officer, Mark Collin, Senior Vice President, Chief Financial Officer, and Treasurer, Tom Meissner, Senior Vice President and Chief Operating Officer, and Larry Brock, Chief Accounting Officer and Controller.

We will discuss financial and other information about our third quarter on this call. As we mentioned in the press release announcing the call, we are posting that information, including a presentation, to the Investors section of our website at www.unitil.com. We will refer to that information during this call.

Before we start, please note that comments made on this conference call may contain statements that are commonly referred to as forward looking statements which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

These forward looking statements include statements regarding the Company's financial condition, results of operations, capital expenditures and other expenses, regulatory environment and strategies, market opportunities and other plans and objectives. In some cases, forward looking statements can be identified by terminology such as may, will, should, estimate, expect or believe, the negative of such terms, or other comparable terminology.

These forward looking statements are neither promises nor guarantees, but involve risks and uncertainties, and the Company's actual results could differ materially. Those risks and uncertainties include those listed or referred to on slide one of the presentation, and those detailed in the Company's filings with the Securities and Exchange Commission, including the Company's Form 10K for the year ended December 31, 2012.

Forward looking statements speak only after the date they are made. The Company undertakes no obligation to update any forward looking statements.

With that said, I will now turn the call over to Bob.

Thanks, David. I'd like to thank everyone for joining us today, and I'll begin our discussion with the highlights of our past quarter.

If you turn to slide four of our presentation, today we reported an increase in net income for the third quarter, and nine months ended September 30th, 2013, compared to the same period in 2012. For the nine month year-to-date period, we reported net income of $11.3 million, an improvement of $2.2 million, or a 24% increase over the same period last year. The robust growth in our gas business, combined with a rebound in electric sales, is producing sustainable year-over-year increases in both revenues and earnings per share.

On slide five, we're executing on our core strategies to continue to grow our natural gas and electric businesses. In our natural gas division, we are making significant investments in cast iron and Veristeel replacements to modernize our distribution system, and we are aggressively targeting new customer growth. Our rate of growth in new customers was 2.5% last year, which is more than double the New England [LDC] average growth rate.

In our electric division, we continue to make reliability and customer service-related investments. And as Mark will discuss later, we implemented cost trackers, distribution rate adjustments, and filed three distribution-based rate cases earlier this year, two gas rate cases and one electric rate case.

We believe that the execution of our growth strategies offers our shareholders a utility growth investment opportunity while at the same time providing the income generated by our dividend yield, which currently stands at about 4.5%.

On slide six, which shows the natural gas fundamentals driving the market opportunity for Unitil. Natural gas offers our customers the best choice of value in terms of superior efficiency, convenience, and low costs compared to competing fuels such as oil and propane. For example, as we've discussed before, residential customers that switched to natural gas from fuel oil for their home heating can reduce their costs by about half, or $1,500 annually.

On slide seven, we achieved an industry leading growth rate of 2.5% in new customer additions and conversions in 2012, and are signing up new customers this year ahead of this pace.

By way of example, we serve two of the largest cities in northern New England, Portland, Maine, and Portsmouth, New Hampshire. These cities are rapidly growing, and we estimate there is more than $400 million in new commercial construction currently being planned in these cities. We are ready to make the necessary investments in our gas delivery system to meet the energy needs of these new customers, and may more customers that are eager to gain access to natural gas throughout our service areas.

Historically, we have seen an annual growth rate of 9% in our gas rate base, driven by these investments to grow our customer base, and improve our infrastructure to provide safe and reliable service to all our customers.

On slide eight, the electric side of our business continues its steady growth. Our electric division generates a little under half of our total sales margin, and provides a stable source of operating income and cash flow, consistent with the overall profile of our utility business. We continue to invest in our electric distribution system to meet our customers' growing needs for efficient reliable electric energy.

Historically in our electric division, we've seen 9% sales margin growth, primarily driven by our recent rate case results and 3% rate base growth.

Now, turning to slide nine for an update on Usource, our non-regulated energy brokering subsidiary, Usource recorded revenues of $4.4 million for the first nine months of the year, an increase of 7% over last year. In addition, Usource currently has high customer retention rates, and a forward book of revenue of $8.2 million as of 2012 year end, which represents revenues under contract to be recognized in future periods.

Historically, depending on average contract length, we realize approximately 50 to 70% of the prior year forward book as revenues in the following year. We grow our forward book by focusing on client renewals and obtaining new business. As you can see from the chart on the bottom left of slide nine, client renewals are a significant portion of our forward book, which highlights our high customer retention rates.

We continue to focus on Usource and are expecting a growing contribution to our consolidated financial results.

Now I'll turn the call over to Mark who will discuss our financial results for the quarter, and provide more detail of upcoming rate cases. Mark.

Thanks, Bob. Good afternoon, everyone. Unitil earned $0.6 million, or $0.04 per share, for the quarter of 2013 -- for the third quarter of 2013. As in prior years, the Company's results of operations in the third quarter reflect the seasonal nature of our natural gas business. Our income is consistently lowest in the third quarter and in the previous second quarter, and significantly more favorable in the first quarter and fourth quarter.

For the nine months ended September 30th, 2013, we earned $11.3 million, reflecting an increase of $2.2 million, or 24%, over the same nine month period in 2012.

On a per-share basis, year-to-date earnings increased $0.08 per share over the same nine month period in 2012. Also, as a reminder, the 2013 per-share results for the nine-month period reflect a higher number of average shares outstanding period-over-period, from the 70 million common stock offering we completed in May, 2012.

Our results of operations for the current year were driven by increases in natural gas and electric sales margins, partially offset by higher utility operating costs.

Turning to slide ten, natural gas sales margins were $12.4 million and $56.3 million for the third quarter and the nine-month periods, reflecting increases of $1.2 million or 10.7%, and $5.2 million or 10.2%, respectively, compared to 2012.

Natural gas sales margins in 2013 were positively affected by higher therm unit sales, a growing natural gas customer base, and higher gas distribution rates. Therm sales of natural gas were up approximately 3% and 10% in the third quarter and the nine-month period compared to prior year, driven by colder winter weather in 2013 coupled with strong customer growth.

There were 15% more heating degree days in the first nine months of 2013 compared to the same period in 2012. Excluding the effect of weather on sales, weather normalized gas therm sales are estimated to be up about 5% for the first nine months of this year, compared to last year, reflecting our very beneficial customer growth rate. Despite the colder weather this year compared to prior year, heating degree days were still below normal by about 3%, which we estimate negatively impacted earnings by about $0.03 per share year-to-date.

Slide 11 highlights our electric business sales and margins. Electric sales margins were $20.8 million and $57.1 million for the third quarter and the nine-month period, reflecting increases of $1.7 million or 8.9%, and $4.4 million or 8.3%, respectively, compared to 2012.

The increases in electric sales margin reflect higher electric kilowatt hour sales and year-over-year increases in electric distribution rates. Electric sales margin in the nine months ended September 20th, 2013, also reflects recovery of $1.1 million of vegetation management, and $0.6 million of major storm restoration costs, both of which are offset by a corresponding increase in operating expenses.

Kilowatt hour sales decreased approximately 1% in the third quarter. However, on a year-to-date basis, electric sales increased about 1% compared to prior year. The decrease in kilowatt hour sales in the third quarter was driven by the effect of a milder summer weather in 2013. There were 15% fewer cooling degree days in the third quarter compared to the same period in 2012.

The increase in kilowatt hour sales in the nine-month period was driven by colder winter weather in 2013 compared to last year, and customer growth. Excluding the effects of weather on sales, weather-normalized kilowatt hour sales are estimated to be up about 1% for the nine months of the year compared to last year.

On both slides 10 and 11, the weather-normalized unit sales increases I just discussed exclude the decoupled sales of our Massachusetts combination gas and electric operating utility. Approximately 11% and 20% of our total system gas and electric sales, respectively, are decoupled, and changes in these sales do not affect sales margins.

I'm turning to slide 12. As Bob just discussed earlier, Usource, the Company's non-regulated energy brokering business, recorded revenues of $4.4 million for the nine-month period, an increase of $0.3 million compared to prior year.

Operation and maintenance expenses increased $1.3 million and $3.7 million for the third quarter and the nine-month periods compared to prior year. The increase in the third quarter reflects higher professional fees of $0.5 million, vegetation management costs of $0.3 million, and all other O&M expenses net of about $5.5 million.

The increase in the nine-month period reflects higher professional fees of $1.5 million, vegetation management costs of $1.1 million, system maintenance costs of $0.6 million, and all other O&M expenses net of $0.5 million.

As I indicated earlier, the increase of $1.1 million in new spending on vegetation management in the first nine months of 2013 is recovered through cost tracker rate mechanisms that result in a corresponding and offsetting increase in revenue and margin in the period.

Depreciation and amortization expense increased $0.7 million and $2.3 million for the third quarter and the nine-month period compared to prior year. The increases in the nine-month period reflect higher depreciation on normal utility plan additions of $1.3 million, higher amortization on major storm restoration costs of $0.6 million which is offset in revenue, and an increase in all other amortization of $0.4 million.

Local property and other taxes increased $0.3 million and $0.5 million for the third quarter and the nine-month period compared to prior year, reflecting higher local property taxes and higher levels of utility plant and service.

Net interest expense in the third quarter increased $0.4 million and $0.1 million in the third quarter and the nine-month period compared to prior year. The increase in the three and nine-month period reflects lower net interest income on regulatory assets, partially offset by lower borrowing rates on lower short-term borrowing balances.

Federal and state income taxes increased $1.1 million for the nine-month period due to higher pre-tax earnings in 2013 compared to 2012.

Now, please turn to slide 13, which is a quick look at the liquidity profile of Unitil. We recently entered into an amended and restated credit facility in early October, increasing the size of our credit facility from $60 million to $120 million. The new credit facility provides for a five-year term, [with borrowings] at LIBOR plus 1 3/8, which is a decrease from the old credit facility which was at LIBOR plus 1 3/4. Our new credit facility provides us with ample liquidity for the foreseeable future to execute on our growth strategies.

Cash provided by operating activities was $84.1 million in the year-to-date period of 2013, an increase of $22.2 million, or 36%, compared to the same period in 2012. This increase in operating cash flow was driven by higher income, improving regulatory rate release and cost recovery, and the continuing realization of income tax benefits available to all our utility subsidiaries.

Capital expenditures were $64.6 million in the nine-month period, an increase of $17.2 million compared to the same nine-month period in 2012. This increase in capital spending primarily reflects the continuing ramp up of the Company's investment in the growth of its gas business in all three states that we operate.

Turning to slide 14, we provide an update on our financial results at the utility operating company level. The chart shows the last authorized return on equity compared to the actual earned return on equity. The chart also reflects recent equity contributions to all our utility subsidiaries with the proceeds from the common equity offering completed in May, 2012.

As we've indicated in the past, we have a -- we have long term capital cost trackers in place to recover a significant portion of current and future capital spending. In May of this year, Unitil's New Hampshire electric utility subsidiary began recovering an increase in annual revenue of approximately $2.8 million, including recovery of about 80% of its 2012 change in net plant, increased vegetation management spending, and an increase in its major storm reserves.

Unitil's first regulated gas pipeline has an annual rate adjustment mechanism which resulted in an increase in revenues of $0.4 million, effective August 1st, to recover capital spending on several pipeline upgrade and replacement projects. Both of these long-term rate plans extend through 2014.

Slide 15 presents a snapshot of our regulatory strategy to bridge the gap between our actual and earned returns on our increasing investment in our gas and electric utilities. In April of this year, we filed base rate cases for our natural gas utility operations in New Hampshire and Maine, for a total rate request of $9.8 million.

In New Hampshire, temporary rates of $2.5 million went into effect July 1st of this year, and will be trued up to permanent rates which are expected to become effective by the second quarter of 2014. In Maine, we are currently in settlement discussions with the staff and the office of the Public Advocate in that state, and we expect permanent rates to be effective by the first of the year.

Both the Maine and New Hampshire gas rate case filings include proposals for capital tracker mechanisms that would allow us to increase revenues by approximately $1 million annually at -- in each state, or a total of approximately $2 million without the need to file a full base rate case.

In Massachusetts, we recently filed a distribution base rate case for our electric operations in that state. The total amount of the increase in distribution revenue requested is $6.7 million, which includes $2.1 million for recovery of previously deferred storm costs over a three-year period, and $0.5 million for -- $0.5 million annually for an enhanced vegetation management program.

In addition to the base rate request, consistent with department precedent for other utilities operating in the state, the filing also proposes to fund a major storm reserve of $2.8 million for effect January 1st, 2015, to address the cost of future major storms through a reconciling storm recovery adjustment.

Substantially all the increases in revenues requested in this rate case will be offset by expected reductions of about $13 million by the end of 2014 in the transition charge, which is a [stranded] cost recovery holdover for industry restructuring. The filing also includes a proposal for a multi-tier rate plan to provide for the recovery of additions to rate base after the rate case, again, without the need to file another full base rate case.

Now, this concludes our summary of our financial performance for the period. I will turn the call over to the operator, who will coordinate questions from you all. Thank you.

(Operator Instructions). And our first question comes from the line of Liam Burke with Janney Capital Markets. Please proceed.

Yes, thank you. Good afternoon.

Hey, Liam.

The -- on the Unitil Energy, or the Fitchburg and Northern, the authorized ROE is significantly higher and you've laid out a nice roadmap as to how to recover those costs to get your ROE back in line with what your regulatory, or authorized ROE is.

Your other properties seem to be very close. Why has there been such a gap? But has it just been you've been doing some heavy up-front investing, and it's just going to take a while to catch up, to close the gap between what your actual and what your authorized ROE are? Both in Fitchburg and Northern?

Yes, it -- they're a little bit different in terms of the two. This is Mark, Liam.

Thanks, Mark.

At Northern, the -- our gas utility with operations in New Hampshire and Maine, as you know, that was a relatively recent acquisition that we acquired in late 2008. And when we acquired the utility it was significantly under-earning, and hadn't had a rate case in over 20 years. As a result of that, when we acquired it, there was significant investment we continued to make for both improving the system as well as for growing the system.

And we are just now, through the [late] rate case process -- which is a lengthy process. It takes you time to put that in place -- just now getting through that process, this is our second time in in getting things stabilized. So I think that we will be on a track to be able to earn our rate of return there, you know, on a going forward basis. Or have a better opportunity to do that, let's put it that way.

Okay.

In Fitchburg, on the electric side, there's -- it's a little more complicated, but the initial -- when we went in most recently for electric rate relief in Fitchburg, two things happened. One, we de-coupled and, two, we -- the results we got out of that last rate case were not sufficient to provide us with that reasonable opportunity to earn our rate of return. As a result of that, this is a fairly quick [filing] to go back in and seek some adjustments to the current rate making in Fitchburg.

We continue to have the de-coupling, but now we are looking to put on top of that a rate plan that would allow us to adjust our revenues over time to address cost increases, inflation, and increases in plant investment that we're making in that system, and allow some more reasonable opportunity to earn that rate of return. And we've put in a full case to achieve that, and we're confident that we can do that through the rate making process in the next several months.

Okay. Thank you. And your CapEx -- I know it's through three quarters now. Is there any material change in what your outlook is for CapEx for 2013?

No, it's about what we've been talking about, so.

Great. Thank you.

(Operator Instructions). Your next question comes from the line of Shelby Tucker with RBC Capital Markets. Please proceed.

Thank you. Good afternoon. Just a quick question on Usource. And, Bob, if you could maybe go through the quarter information. I saw for the quarter, revenues were flat at 1.5 million, gross margins were slightly down, and the book, the forward book actually has come down since the last quarter. Can you maybe explain the dynamic going on at Usource?

Yes. The -- let me deal with the forward book. I mean -- well, let me deal with the business in general. I mean, it's a seasonal business. I mean, the third quarter tends to be the slowest period just because the highest quarter is the last quarter, because a lot of people have their contracts at the end of the year, and when they renew they start on January 1st. So you would expect to see a pickup in the fourth quarter on all fronts, in terms of Usource.

In terms of the forward book, again, we have a lot of renewals, probably the largest number of renewals we've ever had in the fourth quarter of this year. And so the question for us is, can we get them all done by the end of the year? It's not a question of if; it's a question of when.

And so the forward book will be determined -- since we do that at a point in time, Shelby? January 1st? Depending on how many of those renewals we can get done by the end of the year, that'll produce what we expect to be within the growth target we've been telling you about, which is between 10% and 15%. And anything that falls over into the next year, we'll pick up next year. So it's not a question of if; it's a matter of when.

Okay. But at least for 2013, we're -- we might not -- we will probably be closer to the lower end of that growth range?

I'd say between -- yes, I'd say -- as of right now, again, depending on how many of these renewals we can get done, I'd say we'd probably be towards the lower end of our range.

Okay. Okay, thank you.

Okay.

Ladies and gentlemen, thank you for your questions. I will now turn the conference back over to Mr. David Chong for a final remark.

Thank you for joining us for our third quarter conference call. If there's any follow-up questions, please give me a call at the office. Thank you.

And that concludes today's conference for today. Thank you for your participation. You may now disconnect, and have a great day.